China steel output, capacity cuts support Q4 price rallies

Chinese imported iron ore and coking coal prices trended at the highest levels in the fourth quarter of 2016, on the back of higher steel output in the world’s biggest producer, and capacity cuts that may have exceeded official targets to lift utilization, according to S&P Global Platts analysis.

Iron ore fines in China rose to a high of $80.41/dry mt CFR China in December for the Platts IODEX 62% Fe benchmark, after starting the year averaging at $41.58/dmt in January.

Premium Low Vol coking coal imports trended in Q4 at triple the levels seen in the first half of 2016, with the pricing peak marked in November at $298.11/mt CFR China.

Chinese steel prices surged in Q4, rebounding after an earlier spring peak had subsided over the summer.

In January 2016, analysts were forecasting a further contraction in Chinese steel output over the year, around the view China’s peak in steel output had come early and seaborne raw materials demand curves needed to be redrawn.

Chinese crude steel production reached 739.4 million mt over January-November 2016, up 1.1% on the same period the previous year.

While already idled steel mill capacity may have also been officially shuttered under the government plans this year, targets, at least at face value, look to have been beaten, Platts Analytics’ MVS estimates published Thursday show. MVS said the cuts increased in pace in the second half of 2016.

“Beijing planned to eliminate 45 million mt of steel capacity by the end of 2016, but based on provincial government announcements, MVS estimates the figure is almost double at 80 million mt,” Platts MVS analyst Sylvia Cao said in a report.

CHINA FIVE-YEAR PLAN

Under China’s 13th five-year plan, 100 million-150 million mt of steel capacity is expected to be removed between 2016 and 2020, and MVS estimates real capacity of 12 million-20 million mt may have been removed last year due to the closure of mothballed operations being included. This was based on remarks from China Iron and Steel Association around the ratio of idled plants being removed.

The CISA and other data “suggests that it will become tougher to remove capacity once they have been closed, as it is harder to close working facilities. Further, as 2016 demonstrated, mothballed operations can restart when incentivized by higher steel prices,” MVS said. “And closed facilities — such as Haixin Iron & Steel which went bankrupt in 2014 — can live again under a new management structure. Unless operations are literally dismantled, there is always the threat of resumption.”

Given the real against headline capacity cuts, the effect on the market may have been less, and steel output increases could have easily come off the back of higher rates at existing furnaces as new larger coastal plants add to China’s colossal fleet.

“As seen in 2016, such a large reduction in capacity has had little effect on overall tons produced and it remains to be seen whether the remainder of the de-capacity target will impact global steel production at all,” MVS said.

“A reduction in less efficient steelmaking may just result in larger, more efficient mills lifting operating rates and maintaining overall output levels.”

As for December, China’s steel output trends were down, with official operating data for the remainder of December for CISA’s member mills due out later this month.

The rest of the global market may be eyeing China to do more to cut capacity. At the same time they would like to see this translate to less steel exports and general oversupply, while export volumes have held up this year alongside more robust output.

“To push Chinese mill capacity utilization up to a more sustainable 80%, it has been suggested by Chinese mill officials that the five-year capacity removal target should be doubled,” MVS added.